Deterrence and tax morale in the European Union

Abstract

Deterrence has been the prevalent strategy to enforce tax revenue both throughout history and in economic theory. This approach is, however, problematic because it is inconsistent with empirical reality. I wish to consider a new way of thinking about taxation, following psychological economics. I submit that individuals have a substantial amount of civic virtue and tax morale. Taxation is ‘quasi-voluntary’ and cannot reasonably be enforced by deterrence. Tax morale is lowered when the citizens have little trust in their state, and feel badly treated by the tax office. According to official surveys, the European Union is faced with a ‘democracy deficit’ and dwindling support from the citizens. At the EU-level, civic virtue and tax morale can be improved by offering more (direct) political participation rights and raising taxes in a decentralized way.